BULLION INVESTMENTS – SILVER AND GOLD

[Dr. Sanjiv Agarwal]

We are all witness to the fact that silver has out smarted its senior- gold. Silver has now emerged as a necessary part of one's portfolio. Given the present trend and future demand, silver will extinct faster than gold and silver prices are expected to rise sharper than that of gold.

Silver has shown an unprecedented rise in the prices and every one wonders at the sharp rise of the metal in last three months. Last week, silver was seen at the highest level ever when it crossed Rs 45000 per kg. This September only, silver was available at below Rs. 30000 a kg as against over Rs 45000 per kg last week, a rise of 50 percent in just less than three months.

On gold rates, it is worth noting that gold prices saw an upsurge of 24 percent in current year itself. It was Rs 16690 per 10 grams on 1 January, 2010 and rose to Rs 20540 per 10 grams on 30^th November, 2010 and crossed Rs 21,000 per 10 grams this month. It is expected that gold prices in India may go up to Rs 23K to 25 K  per 10 grams due to safe haven buying  and  inflation. The  global concerns will keep the prices firm.

 Why silver is rising. The reason appears  to be simple- more demand than supply. Of late, silver as a emerged as a substitute for precious metal -gold as investors  see silver as a metal of store of value, just like gold. Use of physical silver for various purposes, as a investment option and for speculation - all have yielded higher demand for silver. In India and else where, silver coins are also in demand. Recently silver coins were seen selling for over Rs 49000 per  100 coins. Unlike gold, silver has industrial uses. Silver is considered to be the best conductor of electricity, the best heat transfer agent, a good catalyst and is also used as a alloy. Next to gold, it is also considered to have highest ductile and malleable properties . It is used in photography, films, motherboards of computers and even in dentistry. On the top of it, there is less of silver (as compared to gold) on earth. Thus, silver becomes rarer than gold and hence the price rise. Not only this, prices rise is more than of gold.

Don't be surprised to know that even at these prices, gold demand for jewellery in India rose  by 73 percent from 297 tonnes in 2009 to 513 tonnes in 2010. This only indicates that gold demand for ornamental gold has risen but the investment demand remains almost flat. Though there is a reduced demand of physical silver in the market owing to high prices and volatility, the demand for silver futures is likely to be in place. The prices of sliver have gone up by over 40% in last three months. Against this, gold has risen by 7 percent during this period. In futures market, silver futures have given a return of over 64% against a 25% return is gold futures.  The weakening euro and dollar, tensions is Korean Peninsula and other regions also add to the enhanced buying of gold. The recent rise in gold prices is also due to warning from the European Central Bank  on the region's finances. Also, increase in the inflows into bullion backed exchange traded funds (ETFs) and expansion in open interest rates in US futures have also contributed to gold upsurge. The holdings of gold in the world's largest gold ETF (the SPDR Gold Trust) have also risen in December, 2010 reflecting huge demand for bullion. However,  If the gold prices correct, which is over due, the silver prices will also see a correction and it is expected that correction in silver will be steeper than gold .

The trading in bullion has sustained despite high prices of both the metals- gold and silver which vouches for the underlying investment demand besides normal business and personal demand. However, market trends suggest that investors have also preferred to defer their annual investment plans in bullion and many consumers have even shifted to silver for jewellery. According to estimates, the sale of 22 carat jewellery items has reduced by about 40-45 percent  and that of 18 carat jewellery has gone up. Also, there is a marked upward movement in sale of gold plated silver jewellery.

No wonder, silver may become as valuable as gold in future, a new gold which may outshine the gold itself. May be then, we will also have silver ETFs, like the gold ETFs, (exchange traded funds) to invest in silver in demat mode.